2019 (7) TMI 1438 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as deduction - HELD THAT - CIT(A) after considering all evidences produced before him relating to the impugned advance, in the form of agreement entered into by the assessee with sister concern for making the advances, the copy of ledger account of the sister concern, bills of material purchased from sister concern, has given a finding of fact that the advances are for making the purchases of medicines from the sister concern, for utilization in the business of the assessee. The Revenue has been unable to controvert this factual finding of the CIT(A). In the light of the same, the CIT(A),we hold has rightly held the advances to be commercially expedient for the assessee . The order of the CIT(A) deleting the disallowance of interest ,therefore calls for no interference on our part since the interest is undisputedly paid for the business of the assessee only. The reliance placed by the DR on the decision of the Hon'ble Jurisdictional High Court in the case of Abhishek Industries Ltd. 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT is we find misplaced since the ratio laid down in that case of disallowance of interest expenses where there are mixed funds available with the assessee, was based and proceeded on the premise that the advance was for non-business purpose, while in the present the advances have been held to be for business purpose. As for the Revenues contention that the disallowance was warranted since the assessee had itself charged interest on such advances in assessment years 2010-11 and 2011-12, we do not find any merit in the same also for the reason that firstly the assessee had explained the reasons for charging the interest in those years, as that the advance in those years was utilized for setting up the manufacturing unit of the sister concern and that subsequently once with the unit was set up, the advance was for the purpose of purchase of medicine from the sister concern and no interest was, therefore, charged on the same. The said explanation has not been shown to be incorrect by the Revenue. Even otherwise, as long as commercial expediency is established, there remains no reason for making any disallowance and it is entirely the prerogative of the assessee to charge or not to charge interest on such advances made. The AO cannot sit in the arm chair of the businessman and determine how the business is to be run. In view of the above, we uphold the order of the Ld.CIT(A) in deleting the disallowance of interest. The ground of appeal Nos.1, 2 3 raised by the Revenue are, therefore, dismissed. Disallowance of salary, wages - assessee failed to demonstrate that the services in lieu thereof were received by it - HELD THAT - Undisputedly the salary register filed during assessment proceedings, and claimed and held to be a piece of evidence by the CIT(A) was the one from which it was noted that there were no signatures against salary/wages paid to certain employees. Therefore, we hold, it cannot be said to be evidence of payment of salary/wages at all. Having held so,the evidences subsequently filed were therefore not clarificatory evidences but were in fact additional evidences filed . As per Rule 46A of the Rules ,these evidences could be taken note of by the CIT(A) only after giving the AO reasonable opportunity to examine and or rebut them.The Hon ble Delhi High Court in the case of Manish Buildwell 2011 (11) TMI 35 - DELHI HIGH COURT has categorically held that additional evidences filed by assesses and admitted for adjudication by CIT(A) ,as per Rule 46A,have necessarily to be confronted to the AO for the purposes of taking account of the same. In view of the above, We therefore consider it fit to restore the issue back to the CIT(A) ,directing him to confront the additional evidences to the AO and thereafter adjudicate the issue in accordance with law after obtaining the comments of the AO.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of salary and wages.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):

The Revenue challenged the deletion of disallowance of ?10,79,275/- by the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the assessee had diverted interest-bearing borrowed funds to a related party as an interest-free advance. The Assessing Officer (AO) had disallowed the interest, asserting that the advances to the sister concern were not for commercial purposes.

The AO noted that the assessee had given advances amounting to ?2,90,12,762/- to its sister concern, M/s Franklin Laboratories (India) Herbals, without charging interest, despite having significant borrowings on which interest was paid and claimed as revenue expenditure. The AO computed the interest disallowed at 12% on the advance, which amounted to ?34,81,531/-. On a proportionate basis, the interest expenditure related to the taxable unit was ?10,79,275/-.

The CIT(A) found that the advances were commercially expedient, as they were made for purchasing medicines used in the assessee's business. The CIT(A) also noted that the assessee had sufficient own funds to make the advances, implying no disallowance was warranted under Section 36(1)(iii). The CIT(A) deleted the disallowance, stating that the advances were for business purposes and the assessee had sufficient interest-free funds.

The Tribunal upheld the CIT(A)'s order, noting that the advances were for business purposes and the assessee had sufficient interest-free funds. The Tribunal found no merit in the Revenue's contention that the disallowance was justified because the assessee had charged interest on such advances in earlier years. The Tribunal concluded that commercial expediency was established, and the AO could not dictate business decisions. Therefore, the disallowance of ?10,79,275/- was deleted.

2. Disallowance of Salary and Wages:

The Revenue contested the deletion of disallowance of ?70,20,654/- made by the AO on account of salary and wages, arguing that the assessee failed to demonstrate that services were received in lieu of these payments.

The AO disallowed the payments as bogus because there were no signatures or thumb impressions of the recipients in the salary and wages register. The assessee contended before the CIT(A) that the employees were regular and payments were made year to year with ESI, PF, and TDS deductions. The assessee submitted additional evidence under Rule 46A, which included salary registers, vouchers, ESI/PF returns, and TDS returns.

The CIT(A) admitted the additional evidence, considering it clarificatory, and deleted the disallowance. The CIT(A) found that the employees were duly registered with ESI/PF authorities and the expenditure was genuine.

The Tribunal, however, noted that the additional evidence should have been confronted to the AO as per Rule 46A. The Tribunal held that the CIT(A) erred in not forwarding the additional evidence to the AO for comments. Therefore, the Tribunal restored the issue back to the CIT(A), directing him to confront the additional evidence to the AO and adjudicate the issue after obtaining the AO's comments.

Conclusion:

The appeal of the Revenue was partly allowed for statistical purposes. The Tribunal upheld the deletion of disallowance of interest under Section 36(1)(iii) but restored the issue of disallowance of salary and wages back to the CIT(A) for proper adjudication after obtaining the AO's comments on the additional evidence.